Performance Pop Quiz: What Happened To The Net Interest Margin?

As interest rates tick up, the margin between interest income and interest expenses at U.S. credit unions slowly expands. Test your knowledge of the state of the net interest margin in the fourth quarter.

 
 

Nearly two-thirds, 64%, of credit union income comes from interest earned on loans. Another 9.5% of total income comes from interest and dividends earned from investments. As interest rates rise, credit unions can expect income from loans and investments to increase as well and possibly even plan to return additional income to members in the form of dividends.

WHAT IS THE NET INTEREST MARGIN?

(Interest Gained on Loans and Investments - Dividends Paid on Deposits) / Average Assets

The net interest margin, which measures the difference between interest income earned and member dividends paid as a percentage of average assets, is helpful in determining how well a credit union is managing its business in a changing rate environment. An organization’s lending, investing, and liquidity strategies all affect its net interest margin, and appropriately priced loans and deposits can significantly enhance the flexibility a credit union has in managing its margin.

Analysts from Callahan & Associates project the net interest margin at U.S. credit unions reached 3.13% in the fourth quarter of 2018, a 13 basis point increase from last year end.

Click on the question to view the answer.

True. The net interest margin has been lower than the operating expense ratio at every year-end since 2003. However, the gap between the two has changed significantly in the past decade.

In comparing the net interest margin to the operating expense ratio — a baseline to determine the extent to which credit unions rely on interest income to cover non-interest expenses — a favorable trend emerges. Ten years ago, the two ratios were 51 basis points apart, with the net interest margin at 3.09% and the operating expense ratio at 3.60%. The operating expense ratio has been at least 10 basis points higher than the net interest margin at each year-end going back to 2011. For the fourth quarter of 2018, the net interest margin is on track to reach 3.13% — 13 basis points higher than year-end 2017 — and the operating expense ratio is on track to reach 3.15%. That leaves a gap of 2 basis points.

NET INTEREST MARGIN VERSUS OPERATING EXPENSE RATIO
FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.18
© Callahan & Associates | CreditUnions.com

The gap between the net interest margin and the operating expense ratio has narrowed in the past five years. Analysts at Callahan & Associates project it decreased to 2 basis points in the fourth quarter of 2018.
Source: Callahan & Associates

False. Analysts at Callahan & Associates project interest income increased 14.0% from year-end 2017, whereas interest expenses jumped 39.5%. %. However, that 14% represents a larger dollar amount.

Interest income is on track to increase $6.7 billion annually, whereas interest expenses are on track to increase a more modest $2.3 billion. Underpinned by four federal interest rate hikes throughout 2018, 14.0% is the highest annual growth in interest income that credit unions have reported since 2007 as well as the largest year-over-year balance increase on record.

INTEREST INCOME BALANCE AND GROWTH
FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.18
© Callahan & Associates | CreditUnions.com

Callahan analysts project interest income increased 14.0% and totaled $54.7 billion as of year-end 2018.
Source: Callahan & Associates.

True. The net interest margin is on track to increase 13 basis points year-over-year to 3.13%. This is the highest it has been since the third quarter of 2011, when the ratio was 3.16%. The net interest margin has increased year-over-year for 20 consecutive quarters.

In the years following the 2008 recession, balances declined for both interest and non-interest income. Although credit union assets grew, the net interest margin fell between 2010 and 2013. Balances for interest income did not grow again until the third quarter of 2014.

Within the past 10 years, the net interest margin has reached a high of 3.27% in the third quarter of 2010 and a low of 2.77% in the second quarter of 2013. Since then, the industry has recorded larger increases in interest income every year, which is reflected in a rising net interest margin.

NET INTEREST MARGIN
FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.18
© Callahan & Associates | CreditUnions.com

The net interest margin reached 3.27% in the third quarter of 2010 but dropped to 2.77% by the second quarter of 2013. It has been on the rise since then.
Source: Callahan & Associates.

How Do You Compare?

Go beyond the national averages and dive deeper into individual credit unions, peer groups, state, and more using Peer-to-Peer. Callahan & Associates will walk you through your numbers with a custom performance audit.

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Feb. 19, 2019


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